Harrisburg Mayor's Arrest May Be Just the First Shoe to Drop

"Wherever this investigation goes, it goes," said Pennsylvania Attorney General Kathleen Kane.

Harrisburg's corruption probe that led to the arrest of former mayor Stephen Reed this week is far from over.

"He was not alone. He could not have acted alone on this," Pennsylvania Attorney General Kathleen Kane said Tuesday, announcing 17 counts and 499 charges against Reed, the capital city's mayor from 1982 to 2009.

The investigating Pittsburgh-based grand jury last month received an extension to Jan. 31. Reporters asked Kane during her press conference in downtown Harrisburg whether the probe would extend to bond lawyers, financial advisors, credit rating agencies and state and county officials.

"This investigation is ongoing to anyone who had their hands on the chain of debt that wrapped around the city," said Kane. "Wherever this investigation goes, it goes."

Prosecutors say Reed diverted municipal bond proceeds, notably related to an incinerator retrofit project, to a special projects fund he allegedly used to buy as many as 10,000 Wild West artifacts and other "curiosities" for himself — including a $6,500 vampire hunting kit — while Harrisburg plunged toward receivership.

Reed failed in his attempt to open a Wild West museum.

Kane said some charges fall under a corrupt organizations category, which she called "the state's version of RICO," the federal Racketeer Influenced and Corrupt Organizations Act.

Harrisburg avoided bankruptcy late in 2013 by selling the incinerator and leasing its parking assets.

Anthony Sabino, a white-collar defense attorney and a St. John's University law professor, said the grand jury convening for a year is most telling. "It's a fair guess that these charges are going to have some linkage to Harrisburg's near-death experience," he said.

Mark Schwartz, a Bryn Mawr, Pa., solo practitioner who counseled Reed this week, said prosecution of the former mayor raises alarm bells.

"This is a really scary precedent that shows a lack of understanding about the municipal bond industry and should scare anyone in the field," said Schwartz. "It totally shifts the burden away from the professionals to the public officials."

Schwartz, a former bond lawyer and investment banker who represented the Harrisburg City Council in its 2011 bankruptcy filing, which a federal judge nullified, said bond lawyers should be on the hook.

"The cop on the block is the bond lawyer," he said. "Bond lawyers are paid a lot of money to make what they hype as a risky decision about whether a proposed bond issue is proper. They issue approving opinions that public officials are supposed to rely upon. They can stop deals in their tracks. Now, so much for being able to rely on an approving opinion."

Reed's lead attorney is Henry Hockeimer, practice leader of the white collar defense and internal investigations group at Ballard Spahr LLP in Philadelphia and a former assistant U.S. attorney in Oklahoma City. Speaking to reporters Tuesday, Hockeimer called the arrest politically motivated. Kane herself is facing possible charges from a Montgomery County grand jury of leaking grand-jury testimony to the media.

Reed told reporters last month he has Stage 4 prostate cancer.

The grand jury presentment chronicled a series of bond deals over 14 years to cover the 1993 purchase of the incinerator by the Harrisburg Authority public works agency for $26.7 million — all borrowed money, according the a 2012 forensic audit by the authority that was the basis for state Senate public hearings later that year. Added to the original purchase was $7.5 million to cover a working capital deficit — an early red-flag for the trash-burner project.

The presentment said that in 2007 the authority, which Reed controlled, issued new debt and certified that the trash-burner debt would be self-liquidating — sustainable through fees charged to neighboring municipalities and counties — despite several projections from "multiple parties" that the authority could not service current debt, let alone new debt.

Meanwhile, said Kane, Reed played fast and loose with the books.

"The Reed model, as it became known, [involved] the issuance of public debt for one purpose, such as retrofitting the incinerator or renovating schools and then diverting at least some of those proceeds to a special projects fund, which the mayor allegedly used to buy things of his interests and create a fund to pay fees to a close group of professionals who supported Reed's interests."

Prosecutors also accused Reed of siphoning $515,000 for artifacts and disguising it as an "administrative fee" related to a $77 million bond the authority issued in 2003 on behalf of the city's school district. Under Reed, the agency's reach had included other municipal entities including the Harrisburg Senators minor-league baseball team.

"Investors bought bonds — Harrisburg School District bonds — and that money went out the door on things like wagon wheels and Wyatt Earp's cane," said Deputy Attorney General Clark Madden.

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